On Wednesday 11th November, we introduced our first Mining Investor Forum in partnership with London South East. Traditionally a multi-sector conference, for this quarter our Forum evolved into a timely, specialised event, focusing on the mining sector.
Driven by renewed interest in “safe haven” assets and Bank of England discussions around negative interest rates in 2021, the line-up of presenting miners provided investors with valuable insights into high conviction investment ideas and a chance to interact with management through the live Q&A.
Scotgold Resources was one of three companies presenting over the webinar, with a management presentation followed by a lively Q&A session featuring questions from both investors and Hardman analysts.
Here, we transcribe that Q&A (edited for concision). You can watch the video of the session here.
The first question is, what impact has coronavirus had on your company and its operations, if any?
During the lockdown period and back in March/April, it obviously put a big dent in our timeline. Essentially, we were able to take advantage of the furlough scheme, so most of our employees were furloughed. We kept on a skeleton crew, who did the sort of care and maintenance of the earthworks, etc. We returned to work when the lockdown was eased. With the current restrictions, there’s nowhere for the guys to go for a drink in a pub after work or at the weekend. But, apart from that, people can get to and from work, and we’re continuing as normal. There are risks associated with this, and we’ve had a couple of scares with one or two employees, or direct employees or contractors who have come down with covid-like symptoms, and so we’ve had to apply our procedures to isolate them until they’ve had a negative test – which, touch wood, so far, everybody has, but there is always that risk that, if a big group of our guys came down with the disease, we would need to isolate people, which could have a delaying effect on our schedule. But it won’t have a material impact on the project.
The next question is about the change in investor attitudes. You said you had a phased programme. What were the objections, or what were the pushbacks? And how has investor sentiment changed since then, and why do you think that is?
The pushbacks we were looking for at the time were in the order of £20m-£25m, and when you go to the big conventional institutions that lend money to gold-mining projects (you know – the big banks – I can name a few, I’m sure everybody knows them), they’re talking about £1m-£2m in due-diligence costs, and they’re normally writing tickets for £100m-£200m, rather than £10m-£20m, so that doesn’t really stack up from a small company’s perspective. So it made what would have been reasonable debt finance expensive, plus it gives us the uncertainty that you have to wait six months for the due-diligence process to complete, and then you go through a credit committee, and you don’t know if you’ve got it or not. So that’s why that didn’t really work from our perspective or the institution’s perspective. Going for the smaller route, the alternative was to go through some more equity-related funds, and they were willing to offer us money, but at extremely dilutive terms. This wasn’t great for the existing shareholders, and we felt we would sort of lose control of the company. So, rather than that, we re-engineered it to just create a smaller first step, a smaller hurdle, which our supportive shareholders then earned through a rights issue, initially, and, subsequently, for raisings, and have funded, and so that has enabled the current shareholders to benefit from the project.
In terms of how it’s changed – yes, we get a lot more people now phoning me, saying “wouldn’t you like money?” We’ve all been offered umbrellas now the sun’s come out!
So the next question is related to what we were just talking about. How does the board look at debt versus equity as a source of funding today, and how might that change in the future?
We don’t have any big needs on the horizon for funding, and we anticipate that the funding we’ve got will fulfil our plans. Once the cash starts rolling in, the question will be how much do we spend on exploration, and how much do we think is a prudent amount to keep us in a little bit of a warchest, should any opportunities arise going forward? And if there’s then anything left, what do we do about a dividend policy? So that’s more in our mind than where we want to raise future money. I think that, throughout, our objective has been to minimise dilution and get debt where we can in a cost-effective manner. We’ve been very fortunate to get debt largely through our key shareholders, but the debt we’ve looked at commercially, we didn’t want it to have a lot of strings attached to it and potentially we could lose the company.
The next question is, inevitably, about your dividend policy. And can you give some more granularity about the time frame and how the board would assess the policy whenever it’s appropriate?
We don’t have a dividend policy at this point in time, and I think it’s probably a bit premature to state, but it’s pretty blindingly obvious, when you look at our numbers, that we are going to be a cash cow; we’re going to be producing more than we can responsibly re-spend. In the short term, there are a lot of opportunities for us to improve our finances, by reducing our debt, reducing finance costs, by increasing our exploration, and so forth. So we’ll spend our money on that first, and there are lots of other opportunities for us to improve the assets we’ve got. And once we’ve done all that, we’ll think about the dividend policy.
The next question is about the current plant that’s being constructed. Will it process all from additional mines?
No, it won’t, and the reason it won’t is because, being in the national park, it’s a very prescriptive planning permit we have, and the mine is taken from the Cononish orebody, which goes through the plant, and which is located right there by the portal. The one thing the parks don’t want is trucks running up and down the glen through the park; so, definitely, we won’t be doing any toll processing. Just the other side of the hill, we are actually outside the park, so if we were to find another deposit or two, we could definitely look at the concept of a centralised processing plant, or several other deposits, and, potentially, those might include additional deposits to Cononish.
I’ve got one last question: can you expand on your gold retailing initiatives for your output?
We’ve got two jewellers. We’ve worked very closely with them over many years. The gold we produce through doré goes through a chain of custody, basically proven provenance, and through the Edinburgh Assay Office, through the refiner and onto the jewellers. Because we’ve had a long relationship with them, and they’ve been supportive, and we we’ve agreed with them that they will take the production for next year, they will both want as much as they can get, so we’ll share between them next year. Thereafter, we will look at how we will share with other interested parties. We have a lot of jewellers and other institutions that are very keen to get hold of our gold. I know gold is gold, but gold that has proven provenance in Scotland has that certain cachet – it’s worth something.